The big will think bigger in 2002

May 14, 2001  •  Post A Comment

Beneath all the concerns about a soft advertising environment, slowing economy and lower earnings expectations is the subtle promise of consolidation growth that is likely to mushroom out of a recovery in 2002.
You can hear it in the comments of the executives of public media companies when they engage in their quarterly earnings calls or periodic announcements. Thanks to new disclosure laws, such conference calls with investors, analysts and press have become anything but routine.
For instance, take News Corp.’s fiscal third-quarter earnings calls last week.
News Corp. President Peter Chernin indicated the company would not waste its time fighting Viacom for equity ownership in and control of Viacom’s UPN. It was enough of a dismissal to make some investors wonder just what News Corp. is up to, since it rarely backs away from a chance to gain distribution or content ground.
The remarks underscored the new reality of a media business dominated by a handful of juggernauts: They can be pals one minute-if it suits their mutual strategic or financial needs-and be tough adversaries the next.
When News Corp. agreed to extend by two years the existing UPN affiliation of the Chris-Craft Industries stations in New York, Los Angeles and Phoenix, it did so in exchange for Viacom agreeing to pay a whopping $2.3 million per episode for Fox-produced “Buffy the Vampire Slayer,” which has been a hit on the rival WB Network.
It was a win-win for both News Corp. and Viacom, but it was a bust for AOL Time Warner’s WB, which has invested money and promotional time in building “Buffy” into a young female viewers’ favorite.
What’s even more interesting is how these product- or service-specific spats will play out in the future among a half-dozen media conglomerates that control nearly all primary distribution and content.
There are so many moving parts at a company such as News Corp., one can get lost wading through its quarterly results. But one revelation surfaced last week that is worth noting: Whether it is the “Buffy” brouhaha, the tug-of-war over UPN, the issue of assured program clearances and affiliations or News Corp.’s pending Chris-Craft acquisition, nuts and bolts broadcasting still matters.
By the second half of this year, News Corp.’s Fox Entertainment Group will own the Chris-Craft TV stations, which it will use as a springboard to a handful of sales and swaps that could help get the TV-station-trading business moving again.
Operating duopolies in New York, Los Angeles, Phoenix and Salt Lake City-in addition to its existing duopoly in Dallas-lifts Chris-Craft’s 35 percent operating margin to the Fox stations’ standard 45 percent collectively and should generate up to $75 million in incremental cash flow within 18 months.
By combining sales forces and other resources and reducing head count in markets where it operates two TV stations and a regional Fox Sports Net, Fox can lift the margins for its combined station group by 10 percent, which would yield another $200 million in cash flow, analysts say.
Positive signs ahead
The Fox duopoly outlook-just like that of Viacom’s CBS-is encouraging even without the fuller duopoly freedoms that many broadcasters are looking to the Federal Communications Commission to approve later this year.
But that’s not the only positive catalyst looming out there for an otherwise sullen broadcast TV sector.
Last week’s appointment of Andrew Lack as president and chief operating officer of NBC was the first in what is likely to be a string of repositioning moves at NBC that ultimately will see the General Electric subsidiary engaged in a number of joint ventures, acquisitions and even a merger.
Like many other companies bound by earnings-per-share results, NBC will be given a lift by the goodwill accounting changes midyear that suddenly make it easier for NBC to acquire assets without hurting GE earnings.
For years, NBC President and CEO Bob Wright wanted to make aggressive acquisitive moves but couldn’t. During that time, competitors such as News Corp. and its Fox subsidiary and Viacom with its CBS subsidiary have become the new consolidation standards. Even a conservative Disney, which owns ABC, knows it must play catch-up, and it wouldn’t be surprising to find AOL Time Warner, which owns The WB, active in the next round of TV station consolidation.
Who will sell? Who will buy?
When it happens-and if it is spurred by more duopoly, cross-ownership and ownership cap deregulation, as expected-the rearranging of broadcast players and fortunes could be extensive.
NBC, Disney and even AOL Time Warner all have good reason to scramble for broadcast groups with choice affiliates such as Hearst-Argyle Television, Granite Broadcasting Corp., Sinclair Broadcast Group, Young Broadcasting and Belo. Eventually, there may be a major battle over Young’s KRON-TV in San Francisco and KCAL-TV in Los Angeles. And even the few remaining independent giants such as Tribune Broadcasting Co. will have to get into the act.
Media giants that have once again been sold on the virtues of radio may opt for a Clear Channel Communications or Citadel to vie for Viacom’s cross-platform strength, which includes the CBS network and TV stations, MTV and other cable networks, Infinity radio and outdoor billboards.
Of course, all of these mega-media players have the funds available to go on a buying spree. For the average broadcaster, capital is tight and pricey. Many broadcasters are pulling back on their digital buildout and acquisition plans. Dramatic revaluations will keep many midsize and small broadcasters from going after each other. Those broadcasters with solid cash flow and keen management will survive whole.
Tossing the newspapers
Many of the quiet, large media groups that own newspapers-such as Gannett Broadcasting, Scripps Broadcasting, Belo and Hearst-may find themselves considering a public spinoff of their print properties to more readily merge their broadcasting interests with each other or with giants such as Disney and NBC that want to secure more distribution.
That the giants all have cable program services as a fallback is an economic plus that more pure-play broadcasters can’t begin to match and will ultimately suffer without during the economic lags.
In the past six months, mega-media players such as AOL Time Warner, Viacom, Disney and News Corp. have demonstrated remarkable flexibility in managing their diverse operations and juggling gains and losses across all of their businesses. These companies have made deep cost cuts without hurting core businesses and have still generated new revenues.
For all the attention paid to the upfront-with good reason, since it can lock in as much as 80 percent of a network company’s revenues in a good year-the big guys can still spread around their risks and synergies enough to have their headway far offset their hits. Broadcasting is still a big chunk of their business, but it’s no longer everything.
Take News Corp. again. Its Fox Network generated a mere $1 million in earnings before interest, taxes, depreciation and amortization in the most recently reported fiscal third quarter, while the Fox TV stations managed to yield $122 million in earnings, down 8 percent from a year ago. Its filmed entertainment earnings fell 43 percent to $63 million while its cable network programming cash flow rose a healthy 25 percent to $35 million in the quarter.
The timing of a recovery is everything. But even as the advertising and economic lull prevails, opportunity will begin to surface to which only the largest, most self-sufficient media players can respond.
Small and even second-tier broadcasters will watch as cable operators and media giants rush past them a few more quarters with multiple revenue streams and businesses that collectively make it easier to survive and thrive in a struggling, fragmented marketplace. These broadcasters will be forced to rethink their fortunes and their futures.
Simply put, even the biggest and healthiest second-tier broadcast groups may have no choice but to consider their bes
t merger and acquisition moves and the creative bartering of their traditional core businesses. The big vertically integrated media concerns can’t wait.
The disappearance of the second and third tiers of broadcasters during the next three to five years would be a cultural tragedy, even if it is an economic reality. But as the ad and stock markets begin to gradually rebound, some broadcast companies may decide that taking a combination of cash and stock in a media growth machine such as Fox, Viacom, AOL Time Warner or Disney isn’t so bad after all.
If that occurs, there would only be those nasty crossover dealings and conflicts of interest to focus on (a la “Buffy”) between the sprawling media players, who wouldn’t have to care about what the rest of us think anyway. And what fun would that be?